The days of the lone landman driving around the back roads taking leas - PDF document

The days of the lone landman driving around the back roads taking leases and visiting courthouses have become a thing of the past. Though there are still a few independent landmen that �t this mold, clients have demanded change and consolidation. Now there are being treated and paid as independent contractors when they actually are employees (at least in the government’s eyes). � W Because the government cares ( and as I will discuss later, there is a settlement program available right now that could save you tens of thousands of dollars ). It might come as a shock, but independent contractors often do not report all of their income on their tax returns. This deprives the government of not only income tax revenue, but FICA and FUTA taxes as well. Unable to raise taxes or reduce the national debt, the IRS and Department of Labor (DOL) are looking to squeeze tax dollars from anyplace they can �nd money. The “misclassi�cation” of independent contractors is one place they are truly focused. Three hundred new investigators have been hired. Fines in this area are up 500%. The IRS has started using sophisticated new software programs that monitor businesses that �t a pro�le for misclassi�cation. Among other things, the software analyzes businesses that have large numbers of 1099 type payments to individuals over threshold amounts and 1099 payments to the same individuals year after year. And, to make matters worse, government agencies have started cooperating and sharing data on potential violators making them easier to catch. � O BAD C I’ve got your attention, but you’re still not convinced, right? In an IRS audit, you may be assessed the employer half of back payroll taxes, penalties, interest; the “contractor’s” half of back payroll taxes; and the amount that “contractor” should have withheld for income tax purposes. In some cases, this number approaches 40% of the amount paid to each “contractor” over the last three years. If you are a brokerage �rm with 10 landmen treated as contractors and you pay them $75,000.00 per year, this could mean $900,000.00 in back taxes. Of course, it probably will not end with the IRS. Because the agencies are sharing information, the IRS may now hand you off to the DOL. The DOL will then come in and ask for the time sheets for those “contractors” who are now employees over the last two or three years. Because you treated them as contractors, you will not have any time sheets so DOL will interview the landmen and ask how many hours of overtime they worked in the last 3 years. With a free pass to answer and no time records to dispute them, the landmen can tell the DOL just about anything and it will then assess you for that overtime. Assuming those same 10 landmen say they worked 2 hours a week of overtime over the last three years, DOL might assess you with as much as $182,799.60 in back overtime before penalties. But it does not end there, Texas Workforce Commission (TWC) may then audit you for unemployment bene�ts for terminated “contractors” that should have been treated as employees. And, once bitten by the IRS and DOL THE ANGER OF MISC AND: IS THE OVERN’S E SETTLE PROGRA TOO OOD TO PA P? BY Michael Kelsheimer , Looper Reed & McGraw � Houston | 1300 Post Oak Blvd., Suite 2000 | Houston, Texas 77056 | 713.986.7000 Dallas | 1601 Elm Street, Suite 4600 | Dallas, Texas 75201 | 214.954.4135 Tyler | 100 E. Ferguson St., Ste. 614 | Tyler, Texas 75702 | 903.594.4381 themselves, your competitors may decide that the best way to stay competitive is to turn in all of the other companies using the same approach. For this, they will receive up to 15% of the government’s recovery in addition to leveling the playing �eld. While there may be honor among oilmen in the patch, the opportunity to level the playing �eld and make some money may prove too tempting to pass up. � WHATTO TREATED? As is often the case when lawyers are involved, the answer is complicated. The IRS, DOL, and TWC each have their own test. Thankfully, however, the general ideas are similar. The following questions assess the fundamental issues of the tests and should give you an idea of whether this may be a problem for your business: 1. Do you provide training, either initially, or along the way Do you have set hours you expect your landmen to be 3. Do you instruct the landmen on the sequence in which they should perform tasks or do you leave it to them to �gure out 4. 5. Have you taken away per diem payments because they just don’t make sense anymore? Do you provide of�ce supplies and\or computers to the 7. Do you provide access to title information through a 8. Do you pay landmen based on the hours worked or a set rate 9. You do not charge back your landmen for bad work if your 10. Do your landmen get paid for all their time on a project rather than having the responsibility to complete a project in 11. You do not have a written contract with your landmen You do not require landmen to work for you through an 13. Do your landmen work for you over a long period of time, 14. Your landmen do not work for any other companies or 15. Do you expect the landman you assigned the work to complete it himself rather than hand it off to an assistant he Do you provide health insurance or other bene�ts to one or If you answered “yes” or “correct” to any of the questions above, you could be a candidate for investigation. There is not a minimum number of positive answers to be at risk, but the more af�rmative answers you gave, the more risk you have of being � WHAT For those of you who answered yes enough to become concerned, there are basically two options: 1. take advantage of the very favorable settlement program now offered by the government to reduce your liability by as much as 95% and re-characterize the contractors as employees moving forward. June 2012 ONTRATOR June 2012 How you approach minimizing the factors above will be different 1. Put the landmen on a written contract that maximizes support for independent contractor status. Require landmen to form entities that then contract with your business. 3. Provide no training or hire someone outside to train the landmen before they come to work for you. 4. Switch landmen to a project based pay schedule which they invoice you for and move away from daily, weekly, or hourly rates. 5. Create risk of loss for the landmen in each project. If they don’t do good work, reduce the amount they are paid. Make the landmen responsible for their own place to work and their own supplies. 7. Work to reduce other factors above from “yes” to “no” in the context of your business style and systems. It makes sense to work with your employment law counsel to help with this process to ensure the least possible risk moving forward. Though you may hate the thought of paying a lawyer, � WHAT S P W IS I SU A OOD EAL? Even with its new investigators, the government cannot catch all the violators. With that in mind, the government has offered a settlement that is primarily aimed to bring violators into the fold so that the government gets that tax revenue on a go-forward basis. To entice businesses to do so, a settlement program has been offered where employers can reduce their exposure for the past to a small fraction of what it might be if your business was audited. Taking the example above where the employer could be exposed to as much as $900,000.00 in back taxes, their new To qualify, an employer must: (1) agree to treat contractors as employees going forward; (2) have timely �led all 1099s for contractors in years past; (3) be in compliance with all past audits; and (4) not be under audit presently. We do not know how long this program will be offered. It could be withdrawn next month, so there is signi�cant risk associated with waiting to enter the program. Check with a lawyer specializing in employment law for more information. June 2012 ONTRATOR law. Michael recognizes that the cost and expense of litigation makes resolving employment disputes chal - lenging. To help avoid these concerns, he utilizes his experience in and out of the courtroom to prevent or quickly resolve employment disputes through proactive employer planning and timely advice. When a favorable resolutions for his clients. For more information on Texas employment law, visit Michael’s blog at www.TexasEmployerHandbook.com. This Looper Reed & McGraw guide is issued for informational purposes only and is not intended to be construed or used as general legal advice. Copyright © 2012 Looper Reed & McGraw, P.C. All rights reserved.